Contract reinsurance: What is contract reinsurance
Contract reinsurance is insurance purchased by one insurance company from another. The company that issues the insurance is called the sedant, which passes all the risks of a particular class of policy to the purchasing company which is the reinsurer. Contract reinsurance is one of the three major types of reinsurance contracts. The other two types are faculty reinsurance and additional loss reinsurance.
Contract reinsurance is insurance purchased by one insurance company from another.
An insurance company is called a Cedant. The reinsurer is the purchasing company that assumes the risk set out in the contract for the premium.
Opportunity reinsurance ceding gives the insurance company more security and stability for its equity in the event of unusual or major events.
There are two types of reinsurance contracts, pro rata and non pro rata contracts.
Treaty reinsurance is one type of reinsurance and the other two types are faculty reinsurance and additional loss reinsurance.
Contract reinsurance is less practical and has less risk that can be denied.
Understanding contract reinsurance
The contract reinsurance represents an agreement between the insurance company and the reinsurer that agrees to accept the risks of the policy in a predefined category for a specified period. When insurance companies take out a new policy, they agree on additional risk in exchange for the premium. The more the insurance company underwrites the policy, the more risk it assumes. One way to reduce the risk to the insurance company is to give some of its risk to the reinsurance company in exchange for a fee. Reinsurance enables the insurance company to let go of the risk appetite and protect against very large claims.
Although the insured may not immediately underwrite each individual policy, he or she agrees to cover all the risks in the reinsurance agreement.
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